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• The law of demand holds that other things equal , as the price of a good or service rises, its quantity demanded falls.
– The reverse is also true: as the price of a good or service falls, its quantity demanded increases.
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The demand curve has a negative slope, consistent with the law of demand.
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• The law of supply holds that other things equal , as the price of a good rises, its quantity supplied will rise, and vice versa.
• Why do producers produce more output when prices rise?
– They seek higher profits
– They can cover higher marginal costs of production
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The supply curve has a positive slope, consistent with the law of supply.
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• In economics, an equilibrium is a situation in which:
– there is no inherent tendency to change,
– quantity demanded equals quantity supplied, and
– the market just clears. Explain -
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Equilibrium occurs at a price of $3 and a quantity of 30 units.
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Shortages and Surpluses
• A shortage occurs when quantity demanded exceeds quantity supplied.
•
Draw and Label
– A shortage implies the market price is too low.
• A surplus occurs when quantity supplied exceeds quantity demanded.
•
Draw and Label
– A surplus implies the market price is too high.
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 The “Invisible Hand” - the market forces of
S + D will push the price up or down to equilibrium
• Explain the “Invisible Hand” -
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Shift vs. Movement in the Demand Curve
• A change in any variable other than price that influences quantity demanded produces a shift in the demand curve or a change in demand.
•
If the Price changes – then it is just a movement along the curve = change in QD
•
Know the difference : Change in QD vs.
Change in D
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• Factors that shift the demand curve include:
– Change in consumer incomes
(normal / inferior)
– Population change
(# of buyers)
– Consumer preferences
(Taste)
– Prices of related goods:
• Substitutes: goods consumed in place of one another
• Complements: goods consumed jointly
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This demand curve has shifted to the right. Quantity demanded is now higher at any given price.
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**Careful: What Came First?
The Chicken or the Egg?
Many people will get confused after the shift in D. They see a higher price and increase in Q and then ask…”why are we buying more if the P went up?”…..
..but need to understand that the Price was a result of a change in the Demand and not the other way.
The shift in the demand curve moves the market equilibrium from point A to point B, resulting in a higher price and higher quantity.
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Practice with Demand
• If income increases and the good is
“normal”….
• If income increases and the good is
“inferior”….
• If income decreases and the good is
“normal”…
• If income decreases and the good is
“inferior”…
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• If the number of buyers increases…..
• If the number of buyers decreases…..
• If consumers tastes change in favor of a good….
• If consumers tastes change away from a good…
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• If Price of good x increases – what happens to good y (substitute)
• If Price of good x decreases – what happens to good y (substitute)
• If Price of good x increases – what happens to good y (complement)
• If the price of good x decreases – what happens to good y (complement)
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Shift vs. Movement in the Supply Curve
• A change in any variable other than price that influences quantity supplied produces a shift in the supply curve or a change in supply.
•
If the Price changes – then it is just a movement along the curve = change in QS
•
Know the difference : Change in QS vs.
Change in S
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• Factors that shift the supply curve include:
– Change in input costs
– Increase in technology
(or increase in # of resources) (or destruction)
– Change in size of the industry
(# of sellers)
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For an given price , quantity supplied is now lower than before.
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**Careful: What Came First?
The Chicken or the Egg?
Many people will get confused after the shift in S. They see a higher price and decrease in Q and then ask…”why are we selling less more if the P went up?”…..
..but need to understand that the Price was a result of a change in the Supply and not the other way.
The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price and lower quantity.
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• If input prices rise…….
• If input prices fall…..
• If there is new technology ….or increase in amount of resources ……
• If there is natural disaster or the depletion of a resource….
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• If the number of sellers increase ….
• If the number of sellers decrease….
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• A price ceiling is a legal maximum that can be charged for a good.
– Results in a shortage of a product
(Binding)
– Common examples include apartment rentals and credit cards interest rates.
• A price floor is a legal minimum that can be charged for a good.
– Results in a surplus of a product
(Binding)
– Common examples include soybeans, milk, minimum wage
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Binding vs. Non Binding
A price ceiling is set at $2 resulting in a shortage of
20 units.
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Binding vs.
Non Binding
5
Why set a
Price floor if sellers now sell less ?
Look at total revenue
A price floor is set at $4 resulting in a surplus of 20 units.
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